In recent weeks we have seen Tesla (NASDAQ:TSLA) and NVIDIA (NASDAQ:NVDA) make parabolic moves. They are crashing to the upside. With the incredible market run we have had since 2008, many, including me, did not see this coming. The big question looms here: What is fuelling these markets higher now after such a significant bull run?
The answer is that we are being squeezed up. As an options trader, I pay close attention to the options markets and how they affect the broader markets. Every time an options contract is bought, there is a series of events that occur. So let's go through that real quick.
Options Contract Process
If we bought one at the money call of, let's say Tesla, we procure that from a market-maker. That market-maker is not in the business of taking a massive risk, so they will buy 100 shares of Tesla and profit on the difference in the price of the options to the stock. So when we see Tesla or Nvidia stock price making a 5-6 sigma move and wonder who is buying the top, indirectly it is retail traders who are buying call options in TSLA and NVDA. We have so many new traders in the markets who are jumping in and buying a Tesla call because it always goes up!
Think about this: we have had one of the most significant pandemics ever, with substantial economic impacts, people not working, less economic activity and yet, the markets are continually reaching all-time highs. So what do we do here? Do we do the traditional buy-and-hold strategy buying at record highs? Do we start shorting the markets because they are at all-time highs and watch them continue to defy logic and continue their ascent as we lose?
The answer is we trade the markets – like TSLA and NVDA. We trade by getting in and getting out and limiting our market exposure until this corrects. We can get the same return as the traditional buy and hold with way less risk by trading, and we can do that using options and option strategies.
Tesla And Nvidia: Learn Before You Earn
Every day on Options Trading Signals, we do defined risk trades that protect us from black swan events 24/7. Many may think that is what stop losses are for. Well, remember the markets are only open about 1/3 of the hours in a day. Therefore, a stop loss only protects you for a third of each day. Stocks can gap up or down. With options, you are always protected because we do defined risk in a spread. We cover with multiple legs, which are always on once you own.